5 zerodha.com/varsity
later HCL declares that their revenues have declined. Quite obviously HCL stock price will also
decline. Which means you will lose money on your investment. However, this news will not
impact HCL’s competitor’s stock price (Mindtree or Wipro). Likewise, if HCL’s management is
guilty of any misconduct, then HCL’s stock price will go down and not its competitors. Clearly,
these risks are specific to this one company alone and not its peers.
Let me elaborate on this – I’m not sure how many of you were trading the markets when the
‘Satyam scam’ broke out on the morning of 7th January 2009. I certainly was, and I remember
the day very well. Satyam Computers Limited had been cooking its books, inflating numbers,
mishandling funds, and misleading its investors for many years. The numbers shown were
way above the actual, myriads of internal party transactions; all these resulting in inflated
stock prices. The bubble finally burst, when the then Chairman, Mr.Ramalinga Raju made a
bold confession of this heinous financial crime via a letter addressed to the investors,
stakeholders, clients, employees, and exchanges. You have to give him credit for taking such
a huge step; I guess it takes a massive amount of courage to own up to such a crime, especially
when you are fully aware of the ensuing consequences.
Anyway, I remember watching this in utter disbelief – Udayan Mukherjee read out this super
explosive letter, live on TV, as the stock price dropped like a stone would drop off a cliff. This,
for me, was one of the most spine-chilling moments in the market, watch the video here
I want you to notice few things in the above video –
1. The rate at which the stock price drops (btw, the stock price continued to drop to as
low as 8 or 7)
2. If you manage to spot the scrolling ticker, notice how the other stocks are NOT reacting
to Satyam’s big revelation
3. Notice the drop in the indices (Sensex and Nifty), they do not drop as much as that of
Satyam.
The point here is simple – the drop in stock price can be attributed completely to the events
unfolding in the company. Other external factors do not have any influence on the price drop.
Rather, a better way of placing this would be – at that given point, the drop in stock price can
only be attributable to company specific factors or internal factors. The risk of losing money
owing to company specific reasons (or internal reasons) is often termed as “Unsystematic
Risk”.